Chips Ride Atop the Leader Board, Part 2

volume xvii issue 3

Macom, Inc. of Lowell, Mass. (NASDAQ:MTSI) has been busy building semiconductors for more than sixty years, primarily microwave applications for the military.   Wall Street analysts consider Macom the last remaining pure play focused on microwave chips for radio.  These chips can be used in all sorts of applications.  Commercial cellular telephone frequencies in North America occupy spectrum at about 700-900 MHz for 3G/LTE, and microwave frequencies north of 2 GHz employed with 4G/LTE and in planning for 5G/LTE networks.

Today we categorize chip manufacturers based on whether they fabricate their own – a foundry with etching and photolithography equipment.  Otherwise we call these fabless, which means the companies design chips but outsource the manufacturing.  Macom considers themselves ‘fab-lite’.  They maintain a facility near headquarters outside of Boston for high-end applications, testing, and R&D.  The bulk of the manufacturing business is outsourced to six foundries in Asia.

CEO John Croteau likes to proclaim that Macom’s future is blessed with the insatiable demand for communication in all varieties, and has centralized Macom’s strategy on chips placed with OEM’s building Ethernet port cards and switches for data centers.  He points out, that of bits traveling in the cloud, three quarters of the traffic is inside the data centers.  Macom estimates there are 40M Ethernet ports in North American data centers today, and they are using a planning number of 70M by 2020.

Macom’s big deal right now is a growing foray into optics.  Via acquisitions for the most part, they build chips that produce pulses of light in a single wavelength, and the chips needed to amplify the light connected to fiber optic cable. Macom completed an acquisition of Applied Micro Circuits Corporation (NASDAQ:AMCC) in January following a trend of consolidation in the business that has been going on for a couple of years.  Macom paid $770M in cash and stock for the company.

The winning piece with the acquisition is Applied Micro’s progress with PAM-4.  In a layman’s description, PAM-4 is a set of rules that describes how to translate light over a fiber optic link into usable information.  Data centers have endorsed PAM-4 as the optics standard for moving to 100 Gbps and faster speeds.  This is a not-so-often case where less is more.  Important because PAM-4 reduces the lasers and drivers needed in current circuit modules from four to one.  Multimode fiber has some speed limitations above 100 Gbps that are avoided when using a laser source transmitting only one wavelength over the fiber.

Speed with this architecture is now a function of grouping modules together rather than multiplexing.  All you need to know is that modules using only one flavor of light are faster and cost less to make than multiple wavelength solutions.  Four 100 Gbps PAM-4 modules can be bound together to make a 400 Gbps ensemble on one Ethernet port.  The data center business predicts the rollout to fully 400 Gbps capable hardware by 2018/2019, just around the corner.

The other jewel with the AMCC acquisition brings hardware-based encryption via the IEEE 802.1AE link-layer standard.  This standard defines how an Ethernet card keeps track of an encrypted data signal coming and going between two capable ports.  802.1AE is called MACsec.  Cisco has a significant role along with other IT communications hardware companies in designing the 802.1AE standard.  Prior to the merger, AMCC was already way out in front of the pack as a strategic supplier of MACsec technology to major OEMs.  Without the hardware encryption, data centers would be easy cyber-targets for malicious hackers at the network layer.

Together, MACsec (hardware encryption) and PAM-4 (optics-based modulation) technologies acquired through M&A have given Macom a seat at the table for architectural discussions with the world's leading enterprise and cloud data center providers to deliver single-mode, fiber-based optical transmission.  PAM-4, now adopted by the IEEE as a commercially suitable optics solution, is expected to be the most cost-effective and efficient enabler of 100/400 Gbps transmission in data centers for years to come.

Last September in Düsseldorf, Macom and BrPhotonics made a demonstration at a trade show with AMCC’s 100 Gbps PAM-4 technology.  Macom successfully repeated the demonstration with Sumitomo Electric, at the Optical Fiber Communications Conference – 2017 in Los Angeles, and announced the new chips as soon to become commercially available.

The other really big deal in Macom’s portfolio is the progress they have made replacing Gallium Arsenide with Gallium Nitride for microwave power amplifiers.  And at reasonable cost with non-government applications.  New GaN amplifiers will be installed in the base stations for cellular telephone antennas at the tower.  The most lucrative, near-term opportunity lies with the rollout of 4G/LTE base stations – a billion-dollar semiconductor market – where GaN plays a critical role in the ability for carriers to expand network coverage, increase data rates and reduce energy costs with operating base stations.

Cell towers and base stations never sleep.  The networks operate 24/7, 365 days a year.  The more robust the amplifier equipment, the better, and major carriers like AT&T and Verizon can afford switching to GaN.  These benefits are rooted in the material science of GaN as a semiconductor, which yields superior power efficiency, signal bandwidth and clean operating frequencies for the most advanced 4G/LTE and future 5G/LTE networks.

There is a bit more relevant detail with the financing that surrounds all of this M&A activity, and Macom issued their IPO in 2012.  The stock is closely held by founders.  Stay tuned for a follow-up discussion in this blog about the financials, to be posted in July.

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